Now Western media are likely to make a case that the Chinese currency manipulation in order to deprive the poor masses like in Africa of cheap good and also buying cheap commodities with strong currency.

The article failed to mention that the Yuan is in the process of being 'internationalized'. The Yuan currency foreign exchange has jumped 240% in London financial markets last year. Banks have offered many Yuan related products and demand has jumped rapidly.
Many countries now trade in Yuan directly with China and have bought Yuan in their reserve.
The demand has driven up the Yuan in the last few years, despite slower GDP growth.

"..I am really appalled at the lack of China-basing in this ET article."

That's bec most of the China-bashers are too busy at the 'shooting of Taiwanese fishermen' sites. Most of the vitriole against China PRC/Chinese are usually from the Tai-Doo (independentistas) and Filipinos anyway. Glad they're taking a break from hectoring China/Chinese for a change.

Let's not forget MNC manufactured exports from China have a 55% import content plus the endeavour is to be less export dependent with a currency deserving respect. India with it's pathetically depreciated rupee now fights rising and substantial imported inflation, thanks to an import bill(largely inelastic) that exceeds it's exports by a whopping 70%.
Buddha Bagai

I find it interesting that The Economist can't decide about China and its future economy.
First there are articles hyping that China will surpass the US's economy in about five years. Of course, these articles always assume that China's GDP will continue to grow 10% per year and all other factors remain constant.
Now this article mentions that growth is disappointing, inflation is low and the yuan is actually appreciating, all of which will certainly affect GDP. In addition, Chinese exports have grown by only 1% during 2013.
So maybe we should just hold off proclaiming the demise of the US until it actually happens (probably not in my lifetime and that's really all that matters to me).

It's just the media. Facts and numbers are what's important. Any information can be "framed". I say 51% wanted to elect A, and you can take the same numbers and say 49% did not want to elect A. Same thing, different ways of framing the information.
There will not be a demise of the US. It is the richest and most diverse economy in the world. The USD will not be going away. The greenback will probably be the reserve currency of choice for awhile. But this doesn't mean the USD's share of trade volume will stay the same. Overall I predict the USD's gross volume increases, but percentage share will probably decrease due to the rise in increased RMB usage.
Personally, I don't view it as a zero-sum game. I don't understand why so many people do. If the RMB does raise in value, people in China will be richer and have more spending power. This is good for businesses that can tap into their needs and tastes. US is amazing at innovating and tailoring solutions to customer needs. Though, this is viewed from the lens of US businesses and those that benefit from MNC [disclaimer myself]. If viewed from middle to lower-middle class Americans, in terms of purchasing power, I suppose a raising RMB will be somewhat a competitor in terms of chasing goods, real estate, services, etc.

Disappointing growth compared to what? Do you realise that the 2nd biggest economy is growing at a 7.5% rate? Where does that leave the west?

And what is the problem with low inflation and appretiating yuan? Chinese economy is rebalancing and is more reliant on internal consumption and service. This should rather ring an alarm bell for a US citizen because it means the emerging markets will be less interested in financing the vast US deficit.

Oh, and this post comes from someone making a living of selling imported goods in China.

Chinese GDP grows at 7.5% at the most; a rate unsustainable in a country which has 1.4 bilion mouths to feed. If it's export-based economy (now failing) is to be changed to import-based one, internal consumption has to be stimulated by increasing wages, thus eliminating the only real advantage China has:
dirt cheap labor.

Btw. Many western companies seeing the writing on the wall are already moving their production to Bangladesh, Chile, Honduras, India, Indonesia, Malaysia, Mexico, Peru, Philippines, Vietnam.

You obviously can't tell a difference between mature economies/saturated markets where 5% growth is a norm in best times, and backward III world countries (like China and India) where 9-10% growth is a norm.
P.S. China is not 'financing US deficit'. Chinese money is simply invested in the safest shelter in the world with many rich Chinese expecting a rainy day in PRC.
[They're of course welcome to invest it instead in Bolivia, Equador, Cuba, Greece, North Korea, Russia, Spain, Syria, Sudan, Venezuela, Vietnam or Zimbabwe.]

Agreed. The demise of America is mostly sensationalism . We'll continue to grow, and remain a competitive, wealthy, and incredibly powerful nation. Our percentage will just decrease, and this oddly makes me chuckle because that's the only thing we truly lose.

Basically yes. Although the term "mature" is used to refer to countries in which markets are saturated with goods to a point at which there isn't much real growth, with most individual/institutional customers simply regularly replacing their old equipment due to its wear-out or obsolescence, incl "moral o.".

But what will happen when Chinese consumers start buying more of the luxury goods produced outside of China, and sold to domestic consumers in China? Say, the yuan appreciates against major currencies whereby local Chinese consumers begin to patronize made in EU and USA products... What would be the effect on the yuan in exchange terms? Are there any empirical data that shows the potential effect of this? I would like to know.

True. GDP per capital is somewhat misleading. It takes the country's GDP and then divides it by the total population. I understand why it is calculate this way, it's a good benchmark. But it can be very misleading.

Certain cities (all Tier 1) in China like Beijing, Shanghai, and Shenzhen actually have relatively high income levels. Around maybe $12,000 USD (per capita). This also includes a lot of the "cheap labor". Shanghai and Beijing each have roughly 20 million people. Just these two cities (almost like city-states actually) have over 40 million people. There are over 4 million people in the top 10% bracket. These people would be considered wealthy even in developed world standards.

It's actually a growing phenomenal that a lot of local Chinese are going abroad to shop for luxury items in US, EU, and HK. This is due partially to high taxes for luxury goods in China and partially due to perceived higher quality differentiation abroad. Nowadays, you can find UnionPay (China's credit card processing company) in many luxury malls in the US and EU. It's actually quite interesting how the landscape is changing so fast.

The Economist has been saying for a while that the yuan is not (much) undervalued any more. Yet the yuan has kept rising.

My take is that the yuan has been seriously undervalued, and that this is due to the actions of the People's Bank of China. Even if there is less upward pressure on the yuan today due to lower growth and export figures, when the authorities loosen their control (for whatever reason), the yuan will appreciate. I am long on the yuan.

However, as a technical necessity for keeping the yuan low, the PBOC, over the decades, has printed a lot of yuan ("backed by" an equivalent amount of dollar assets in its vaults.) The PBOC uses special devices to try to keep the extra yuan out of circulation in China (to keep inflation low.)

So, my question is: how much total yuan is there as compared to China's GDP? And how does this ratio compare with the figure for USA?

Copious cheap energy in the USA; rising wages in China; the relatively high "failure rate" in manufacturing in China relative to the US; consequences of the "one child" policy as the average population ages; the "invisible" drag of corrupt practices on the cost of doing business; paranoia about breakup of China; continuing lag in engendering of creativity in the general population. There are so many structural and cultural reasons why China is ill-equipped to be the dominant world power in the longer term.

Personally I am more concerned that the wheels are in the process of coming off the Chinese growth spurt, which will have significant impacts on its neighbours and suppliers. The question is whether or not stalling of growth will be a spur for more serious political and social implications internally.

Along with several other commentors, I think it is far too early to be talking about the Yuan as the world's new reserve currency.

Let's lift our eyes towards the horizon, rather than indulging in short-term extrapolation of what are relatively recent trends and assuming they provide a roadmap for the future. More likely, impending dislocational change resulting from the confluence of robotics; increased computing power; and massive growth in other IT capability is going to be a game changer that is likely to effectively eliminate any strategic advantage conferred by an obedient and low-cost workforce.

People need to content less with dominant power blah blah .... this and that.

I don't think any educated person in their right mind would argue, including the the Chinese Central bank, that the RMB will be become the de-facto reserve currency anytime in the near future (50 years at least).

Already, China is actually the largest net importer of robots. Chinese manufacturing is shifting from the cheap labor model to more value added. Woe to the textile and clothing industry in China. But overall a shift towards higher value added goods.

None of this actually matters in convertibility of the yuan. China is already the largest trading nation as measured in sum of imports and exports of goods. This is the most important factor. As more goods are traded, regardless of either imports or exports, in China the value of yuan in forex markets will increase due to sheer volume. As more trade with Chinese partners are settled with the RMB, the internationalization and importance of RMB will increase.

This will in turn further drive up the value of the yuan. Now whether this is good or bad in the long run depends on which point of view you are ascribe to.

Personally I am bullish and long certain ETF's associated with these trends.

I have lived long and thought about these things... I find that this sort of questions (i.e. which country or civilization will rise or fall) are extremely hard to answer. Each country has a ton of problems when you list them, but also has a ton of strengths when you list those. Often a "freak" event will change the direction of affairs forever (e.g. World War I shifted the center of power from Europe to the US.)

So, my general inclination is to avoid making country predictions. However, there is one indication that seems to be pretty unmistakable, and that is financial position.

Due to the way the world's monetary system works, a biggish and generally well-run country whose currency is not as inflated as the established dominant powers' has a great advantage. This is because savers and central banks around the world are always looking for a safe haven in a world of fiat currencies. When they identify a country's currency as a good investment bet, money will flood in and (provided the country basically manages itself well) will drive a virtuous cycle of economic strength and advancement of population.

This was basically how the USA, for a long time behind Europe in almost every way, came to dominate the Western world politically, economically, and militarily.

The only possible problem for China is that we don't know how inflated the yuan really is. Over the past two decades the Chinese central bank has printed a lot of yuan to buy dollars from Chinese exporters in order to keep the yuan cheap. If this question can be answered in favor of China, I would guess that China can be the next USA.

Markets shall indulge in this prediction of an impending implosion of China due to an unsustainable economic model of cheap exports ? Reforms addressing this unsustainable model by turning into a domestic consumption economy shall fail ? Thousands of engineers/technocrats churned out in China yearly shall not embrace the new technologies (robotics, etc) ? They shall return to farm implements ? They shall be fountains of social unrest in their dream/determination to be a bigger economic power ? They shall not use the world largest foreign reserves to buy higher level tech gears and commodities to move up the ladder ? Global trade and investments shall shun away from Yuan not printed by US/EC/Japan printing presses? Lifting our eyes towards the horizon...we see perhaps a rainbow.

Confer WSJ article I linked to above re China fudging its numbers.
In reality not only us in the West, but even Chinese Politbureau doesn't have a clear picture of PRC's economic output and GDP. Both likely highly inflated.

The World has today three major currencies that serve as anchor to other currencies; The Euro, The Yuan, and the USADollar. Every Central Bank, among the 140, or so, institution can pick and choose the place where they will use to protect their reserves. So it is a free competition among these three Anchor Currencies. This Multi polar System is EXTREMELY UNSTABLE. Conclusion : The Federal Reserve WILL raise Interest rates. The rest is journalism and poetry.

The Federal Reserve does not respond (react) to the "Economy", Because the "Economy" is an abstract term which the Federal Reserve, or any other Central Bank, does not comprehend; It is too abstract. The Central Banks understand only, and respond only, to the Market forces. The Foreign Exchange, the Bonds and especially to the Stock Exchange.

PRC's regime wants to transfer 250 millions of Chinese farmers to cities hoping they'd generate income which would increase domestic consumption. The problem (overcrowding and incredible pollution aside)is that only 30% of them have hukou, that is urban residency permits thus not qualifying for medical services, insurance, and their children for schools in those concrete deserts.

You can have interest rate knob, or you can have a exchange rate knob. In a efficient economy, you can't have both. And right now, China wants the interest rate knob much more than the exchange rate knob. And she's working make to squeeze the exchange rate knob and try to pop to the interest rate knob. This is a one small after-effect of that process. If you read a lot of Chinese sources, it's not hard to see this effort and reasons for it. See these articles below.

When the Yuan was weak, the US and EU were unrelentingly making lots of noise and complain, accusing China for deliberately keeping its currency low. Now when Yuan is stronger, they feel uneasy again, arguing that China has made its currency uncomfortably strong.

What kind of western attitude is this? Not deplorable? (mtd1943, ttm1943)

For years, all I've heard is how the Chinese have unfairly made their currency weak, and one part of the strategy was to keep on buying $USD.

Today, ALL OF A SUDDEN, we hear that it's now over-valued.

If the US was complaining that China had a weakened currency in the past, this implies that now, the USA is in a more advantaged position to do business with China. China's strong economy is GOOD for our business, and we are likely to import less of their stuff.

By the way, I would think that:
1. China can now purchase more of our stuff, and our trade imbalance would shrink in the longer run. Perhaps this lag time explains why we're still on track to have record imbalances. Since they can buy more of our stuff, this would be inflationary for us. True or False?
2. China can now purchase more commodities, like oil, and this would be inflationary for us. True or False?
3. What is BAD about China's currency getting stronger, since it seems this is what we've wanted all along?

When will the avalanche of complaints against Japan's (Abenomics)currency manipulation start to saturate the media. Already there's rumor that GM will be officially taking this unfair currency policy to the WTO. This deliberate debasement of the Japanese yen gravely concerns the competetiveness of German, Korean and American auto/ parts makers, potentially affecting millions of quality high end jobs in these 2 countries. Most likely, there will be a major shootout at the OK corral, aka WTO.

All of these handwringing when the yen is gracing 100 yen/$. Just wait till it skids to its natural state at 135 yen/$, wc was the level before 2006.

So far we haven't heard from the normally vociferous American media, esp wsj, nyt, on this sensitive matter at a time of great recession in US. If it was China doing this, the media would have exploded and on streets demanding blood.

They don't teach this, monetary value stuff, in USA public high schools, but they should. U.S. Dollars are becoming worth-relatively-less. What is merit and how is it measured? Drug dealers w no formal ed live in the best neighborhoods in the USA. Merit is in flux when measured by monetary wealth. It almost seems to indicate merit in inverse relation to monetary wealth. ... "The day the music died?"